Fannie Mae, the nation’s largest buyer of home loans, gave investors little reason to cheer Tuesday, announcing a $2.2 billion quarterly loss and a dividend cut, and warning of steeper losses ahead. But investors celebrated anyway, bidding up the stock 9 percent, to close at $30.81.
Their optimism stemmed from the belief that Fannie Mae is in a position to pick and choose among the best and safest loans currently in the marketplace. The company, which buys mortgages from banks and other lenders, announced it would raise $6 billion in new funds to purchase additional loans and shore up a listing balance sheet.
“As the market recovers, we will be a prime beneficiary,” Fannie Mae’s president, Daniel C. Mudd, said in a conference call with analysts Tuesday morning. When the housing market finally stabilizes, the company will “feast” on the mortgages it is currently buying, he added.
Those sentiments were bolstered by Fannie Mae’s regulator, the Office of Federal Housing Enterprise Oversight, which announced Tuesday that the company had been released from growth limits put in place in 2006 when audits showed that the company had been manipulating its books.
The regulator also cut the capital reserves that Fannie Mae must hold, in essence betting that the safest course, for both the company and the housing marketplace, is for Fannie Mae to invest more aggressively and with a thinner cash cushion.
But some lawmakers continue to express long-held concerns about Fannie Mae’s financial health.
“Regulators need all the tools they can get to make sure these companies don’t fail, especially since we’re talking about entities that have over $5 trillion in financial commitments and debt,” said Senator Richard C. Shelby of Alabama, the senior Republican on the Senate Banking Committee. “Six billion dollars looks like a pretty paltry sum, and if we get into a further housing downturn, that capital can go pretty fast.”
Fannie Mae, along with Freddie Mac, are essential lubricants in today’s housing marketplace. The companies buy more than 80 percent of all home loans made by banks and lenders, providing fresh financing for more home mortgages. At the end of 2007, the firms had a combined cushion of $83 billion, underpinning a colossal $5 trillion in debt and other financial commitments.
But the companies are being pushed in opposite directions. Some regulators and lawmakers want them to buy more and riskier loans to jump-start a revival in the housing market. Others worry that if the companies spend too freely, they will suffer even greater losses, which could require a taxpayer-financed bailout.
If that were to occur, it could ripple through the entire stock market and economy, creating a crisis of confidence about the trillions in mortgages the company owns and has guaranteed.
To offset those concerns, regulators and lawmakers have pushed the companies to raise additional capital. Last year, both companies raised $13 billion from investors. Regulators have pushed them to go even further this year, but some shareholders have complained that raising too much additional money will drive down stock prices and dilute investors’ stakes.
Those complaints come as the companies also face a worsening housing marketplace. Mr. Mudd, Fannie Mae’s president, said in Tuesday’s call with analysts that home prices might fall by 7 to 9 percent this year, and that the company would experience losses of as much as $4.4 billion.
Mr. Mudd said that as the company takes losses on bad loans made in previous years, however, it is also buying new loans held by borrowers with much better credit. And because Wall Street has largely abandoned the mortgage marketplace, Fannie Mae and Freddie Mac can charge higher fees because of decreased competition.
Some analysts, however, are less optimistic.
“These guys have been confident on their conference calls for the last couple of quarters, but then they come up with bigger and bigger losses,” said Paul Miller of the Friedman, Billings, Ramsey Group in Arlington, Va. “Wall Street wants to be bullish about something, and they think Freddie and Fannie are going to lead the way. But at some point, investors are going to wake up and realize these guys are losing real money.”
As part of Tuesday’s conference call, Mr. Mudd revealed that falling home prices and rising foreclosures that started in the subprime marketplace had spread to the higher-quality loans that Fannie Mae and Freddie Mac traditionally buy.
And though Fannie Mae expects profits down the road, the loss announced on Tuesday follows a record $3.6 billion loss in the fourth quarter of last year.
In an effort to preserve cash, Fannie Mae said on Tuesday that it would cut its common stock dividend to 25 cents a share, from 35 cents.
That announcement, however, did not dissuade Moody’s Investors Service from downgrading the company’s financial strength by one notch. Other ratings agencies have warned they may follow suit.
Freddie Mac is also expected to post a significant loss when it reports its first-quarter results next week. The company will have to answer questions regarding its accounting, which its regulator has said shows “internal control weaknesses.”
And both firms still face Congressional scrutiny, which is increasing as lawmakers consider proposals to increase regulators’ powers over the companies.
A bill changing how Fannie Mae and Freddie Mac are policed has passed the House, and negotiations over the legislation are continuing in the Senate, according to Democratic and Republican staff members. Lawmakers say they believe a bill may pass as soon as in the next two months.